Question 1

Suppose Lisa has $$40 to spend each month. The price of a movie is 8 $$and the price of a case of cola is $4. Which of the following combinations is NOT affordable for Lisa?

Accepted Answer

5 movies and 1 case of cola

Question 2

Given Lisa's budget equation $$P_C Q_C + P_M Q_M = Y$$, where $$P_C is $$the price of cola, $$Q_C is $$the quantity of cola, $$P_M is $$the price of a movie, $$Q_M is $$the quantity of movies, and $$Y is $$income, what does the slope of the budget line represent?

Accepted Answer

The relative price of movies in terms of cola, $$\frac{P_M}{P_C}$$

Question 3

If Lisa's income increases from $$40 to 60$$, with prices unchanged, what happens to her budget line?

Accepted Answer

It shifts outward in a parallel fashion, slope unchanged

Question 4

Which of the following best describes an indifference curve?

Accepted Answer

A line showing combinations of two goods among which a consumer is indifferent

Question 5

If the price of movies increases, what happens to Lisa's budget line?

Accepted Answer

It rotates inward, reducing the affordable quantity of movies

Question 6

What does the marginal rate of substitution (MRS) measure?

Accepted Answer

The rate at which a consumer is willing to give up one good for another while remaining on the same indifference curve

Question 7

If Lisa is willing to give up 2 cases of cola to see one more movie at point C, what is her MRS at that point?

Accepted Answer

$$MRS = 2$$

Question 8

Which statement about the principle of diminishing marginal rate of substitution is correct?

Accepted Answer

As a person consumes more of good x, they are willing to give up less of good y for each additional unit of x

Question 9

At the consumer's best affordable choice, which condition must be satisfied?

Accepted Answer

The marginal rate of substitution equals the relative price of the two goods

Question 10

If Lisa's MRS at point F is greater than the relative price, what should she do to reach her best affordable choice?

Accepted Answer

Consume more movies and less cola

Question 11

What is the effect called when a change in the price of a good alters the quantity consumed of that good?

Accepted Answer

Price effect

Question 12

If the price of a movie falls from $$8 to 4$$, what happens to Lisa's budget line?

Accepted Answer

It rotates outward, increasing the affordable quantity of movies

Question 13

What is the substitution effect?

Accepted Answer

The effect of a change in price on the quantity bought when the consumer remains on the same indifference curve

Question 14

For a normal good, what is the direction of the income effect when income increases?

Accepted Answer

Quantity demanded increases

Question 15

For an inferior good, what happens when income increases?

Accepted Answer

Quantity demanded decreases

Question 16

If the negative income effect is stronger than the substitution effect for an inferior good, what happens to the demand curve?

Accepted Answer

It slopes upward

Question 17

Which formula expresses Lisa's real income in terms of cola?

Accepted Answer

$$\frac{Y}{P_C}$$

Question 18

If Lisa's budget equation is $$P_C Q_C + P_M Q_M = Y$$, and she spends all her income on movies, how many movies can she afford?

Accepted Answer

$$\frac{Y}{P_M}$$

Question 19

Which of the following is NOT a property of indifference curves?

Accepted Answer

Indifference curves are upward sloping

Question 20

If the indifference curve between movies and cola is relatively flat, what does this indicate about Lisa's willingness to substitute?

Accepted Answer

Lisa is willing to give up a small quantity of cola to get more movies

Chapter 9: Possibilities, Preferences, and Choices – Microeconomics Study Notes

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